AD-AS ANALYSIS - NOTE ON AD-AS ANALYSIS FOR HW#3A FOR ECON...

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NOTE ON AD-AS ANALYSIS FOR HW#3A FOR ECON 205 The following are some general rules regarding the relationship among outcomes. 1. if (P)rice↑, inflation↑ 2. GDP↑, (u)nemployment↓ 3. (r)eal interest rate↑, (I)nvestment ↓ 4. GDP↑, I↓ The following are how exogenous factors affect outcomes in an AD-AS framework: 1. G ↑or T ↓ In the SR: AD shifts right, so GDP should ↑, as well as P In the financial market, since government will need to borrow more money for expenditure, the demand for money will increase, hence r will ↑. Nominal interest rate (i) ↑ as both P ↑ and r↑. Increasing GDP causes I to go up, but increasing r causes I to go down, hence we don’t know unambiguously the direction of change for I. In the LR: LAS is vertical and will not change, so GDP will remain the same (→). Price level (P) should ↑ as AD shifts right. GDP→, G↑, so I must ↓ (crowding out effect).
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